Choosing the Life Insurance That Is Best for You
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Choosing the Life Insurance That Is Best for You
Choosing a life insurance policy depends on many factors about yourself. It’s not possible to use a single rule of thumb to tell you how much you need. You will have to take into account such things as:
Things To Know
- Take into account such factors as your income, age, and dependents.
- Some people "buy term and invest the difference."
- Some like the ready-made investment nature of whole life.
- Your sources of income
- Your dependents
- Your dependents’ expenses now and in the future
- How soon your dependents will stop being dependents
- All your debts
- Your age
A general guideline used by many is that you would need life insurance coverage of between 5 and 10 times your yearly salary. An insurance agent can sit down with you and help you figure out how much is appropriate for you.
Term vs. whole
When choosing a life insurance policy, you will be confronted with the question of term vs. whole. Term is pure insurance, meaning that it pays a death benefit upon your death to your dependents. It is fairly inexpensive if you buy it young, and the premiums eventually rise greatly in price as you age. Whole life insurance is a death benefit plus cash value, the latter of which comes from how it is invested by the insurance company (term does not have this cash value). The premiums stay level over the years that you pay them, because they are averaged.
Between the two, whole is more expensive. Large commissions and fees are built into it during the early years. An important question to ask, therefore, is how much you are able to pay for premiums. If it’s not much, then you may find term insurance more suitable for you.
There are variations on whole life called variable life and universal life. Variable allows you to choose the investments that will fund it, while universal allows you flexibility in the amount and timing of your premium payments (though there will be fees for this privilege).
Are you looking for an investment?
Some proponents of term life apply what is called "buy term and invest the difference," meaning they take the difference between term and whole life premiums and invest it elsewhere, such as a mutual fund. They build wealth that way while avoiding the large commissions.
Others like the ready-made investment nature of whole life. It is a product that takes care of a person’s need to build up a nest egg for their dependents. This relieves them of the vigilance required to invest on one’s own. Also, you can take tax-free loans out of a whole life policy, and you can also surrender it early (though that is contrary to its purpose). The earlier you surrender it, the lower its cash value will be. But once you do, you can use the proceeds for all kinds of important expenses, such as education or business use.